Wednesday, December 2, 2009

Thomson Default Swaps Triggered by Bankruptcy Event

Posted on Bloomberg by Abigail Moses

Credit-default swaps on $887 million of Thomson SA debt will be paid out after the Paris-based owner of film processor Technicolor Inc. was granted protection from creditors.

The settlement will cover all outstanding contracts on Thomson that weren’t resolved in auctions last month, according to the International Swaps & Derivatives Association. More than $1 billion of Thomson swaps were then settled as part of a restructuring event, resulting in losses for some investors who bought the contracts.

Thomson filed for creditor protection yesterday under French bankruptcy law as it seeks to reorganize $2.8 billion euros ($4.2 billion) of debt. Credit swaps settled in the restructuring process paid some holders 30 percent less than amounts awarded to other investors.

“This just confirms the previous auction was a poor result from the point of view of protection buyers,” said Michael Hampden-Turner, a credit strategist at Citigroup Inc. in London.

Thomson provided the first test of procedures designed to help meet regulators’ demands for more transparency after the meltdowns more than 14 months ago of Lehman Brothers Holdings Inc. and American International Group Inc., two of the largest traders of credit-default swaps.

Restructuring Event

The company caused a restructuring event in August when it said it deferred payments on $72.5 million of 6.05 percent private notes due this year.

Swaps can be triggered in Europe by bankruptcy, failure to pay or debt restructuring, under protocols governed by New York- based ISDA. Under a bankruptcy, contracts are automatically triggered, while in a reorganization investors choose whether to settle through a series of auctions based on expiration dates.

Thomson contracts can now be settled under the simpler bankruptcy method that produces one recovery value, after a vote by a committee of 15 dealers and investors that makes binding decisions for the market. Legal & General Group Plc was the only member to vote against the event, according to ISDA. Steve Leach, a spokesman for the London-based insurer, declined to comment.

“This will be a much cleaner settlement because you’re going to have one price, as opposed to a restructuring where you bucket the payouts by maturity,” said Brian Yelvington, head of fixed-income strategy at Knight Libertas LLC, a Greenwich, Connecticut-based broker-dealer.

The rules are being tested as the global default rate rises. The rate for companies ranked below investment-grade reached the highest since the Great Depression in October and will peak at 12.5 percent this month, Moody’s Investors Service said Nov. 5.


Credit-default swaps are derivatives, contracts with values derived from assets or events, including stocks, bonds, commodities, currencies, interest rates or the weather. Banks, hedge funds and insurance companies use the swaps to insure bonds and loans against default or to speculate on the creditworthiness of countries and companies.

Thomson will meet with its bankers on Dec. 21 and its bondholders on Dec. 22, before a shareholder meeting scheduled for Jan. 27.

Contracts protecting a net $887 million of Thomson’s debt were outstanding as of Nov. 20, Depository Trust & Clearing Corp. data show.

Thomson swaps were quoted at 29.5 percent upfront before the ruling, according to CMA DataVision. That means it cost 2.95 million euros in advance and 500,000 euros a year to protect 10 million euros of Thomson debt from default for five years. It implied a nearly 100 percent probability of default, assuming a recovery of 68 percent, CMA said.

Thomson’s 500 million euros of undated 5.75 percent junior subordinated bonds fell 3 cents on the euro to 7 cents, according to HSBC Holdings Plc prices on Bloomberg.

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